Integrating Relevant ESG Indicators in the Investment Process (SD-KPIntegration)
Institutional investors have a fiduciary duty to consider environmental, social and governance (ESG) indicators that are relevant to financial performance (see Freshfields Bruckhaus Deringer, 2005, page 13).
European companies must disclose ESG indicators relevant to their business performance in management reports (see Articles 19 and 20 of EU Accounting Directive 2013/34/EU).
- industry-specific "Sustainable Development Key Performance Indicators" (SD-KPIs; SD-KPInform database for more than 4500 companies worldwide; iSTOXX® SD-KPIndex® family: EURO iSTOXX® 50 SD-KPI, iSTOXX® Europe 50 SD-KPI, iSTOXX® Europe 600 SD-KPI - concept)
- or a thematic approach (Big Six®).
- a clear definition based on transparent global standards.
Institutional investors expect that SD-KPIntegration contributes to outperformance in the long term. This was the consensus of leading European pension funds who were queried as part of a study (see page 18). Here are some examples for outperformance effects: The broad market index iSTOXX® Europe 600 SD-KPI (concept) shows outperformance in the backtest 2008-2015. Subprime risks were integrated in a SD-KPI for banks in January 2007. BP was underweighted before the Deepwater Horizon oil spill happened.
In a separate study (see page 26), German institutional investors viewed SD-KPIntegration as the best way of making sustainable investments mainstream.
SD-KPIs can be integrated into the investment process in a way that is easy to comprehend, standardised and systematic. The process enables the portfolio and the related mandates to remain largely intact – regardless of whether the registered trademark SD-KPInvest® is used for active investments or the SD-KPIndex® is used for passive investments.
This process is particularly appropriate for equity and bond investing and does not necessarily entail limiting the investment universe via exclusion. The process also enables the portfolio and the related mandates to remain largely intact, so that the cooperation between asset owners and asset managers may continue.
For clients and cooperation partners of SD-M® please click on references.
For European and global institutional investment studies of SD-M® please have a look at UN PRI Services.